UK now Europe’s favourite stock market

After years of being shunned by global investors, London is now regarded as Europe's preferred equity market, survey shows. Our markets commentator reports.

London's resurgence in the eyes of global investors was highlighted today when an influential survey of fund managers named the UK as Europe's new favourite stock market.

Global allocation to UK equities increased sharply last month, according to Bank of America, as investors have increasingly shunned US stocks, industrials and technology.

Amid the rotation towards the UK, emerging markets and energy, investors are now their most underweight on the technology sector since August 2006 as central bank tightening continues to be regarded as the number one risk to markets in 2022. Banks are still the leading global overweight preference amid rising interest rates.

London's leaning towards energy, commodity and financial stocks means the FTSE 100 index has comfortably outperformed other global benchmarks so far this year, having been one of the laggards earlier in the pandemic and since the Brexit vote in 2016.

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The FTSE 100 ranked 25th out of 28 major indices for its performance between 23 March 2020 and New Year's Eve, whereas the Nasdaq and S&P 500 more than doubled in value.

The blue-chip index is now at a two-year high, having weathered various storms including the surge in inflation and ongoing Ukraine crisis. A look at the composition of the MSCI UK index explains why, with a 13% weighting towards energy and 19% to financials, versus just 1% for technology.

Year-to-date, UBS notes that UK energy has returned 25% amid the surge in energy prices, with financials up by around 11%.

According to the European fund managers surveyed by Bank of America, the UK is now the continent's favourite equity market after Germany and Italy moved from a large overweight position to a small underweight.

The shift in sentiment is shown by a net 4% of global investors now underweight UK equities, down sharply from 13% the previous month. This move comes as 72% of European investors back value to outperform growth stocks, the biggest margin since 2014.

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Overall, the net proportion of these investors saying they are overweight banks has stayed at record levels.

However, the bigger picture is one of heightened uncertainty after 57% of survey participants said they expect European equities to rise by at least 5% over the coming 12 months, down from 81% last month. About 18% see scope for equities to decline, up from 3%.

A net 20% of survey respondents expect the global economy to weaken over the coming year, up from 1% in January, making this the most pessimistic reading since March 2020.

European investors are more optimistic, with a net 12% expecting better growth in Europe, although this is still a recovery low.

Optimism on China has also cooled, with the proportion seeing the potential for Beijing policy stimulus to act as a catalyst for global growth fading from 50% to 42%. And a growing majority of 73% thinks supply-chain disruptions will ease too slowly to provide a meaningful global growth boost.